Fee-Only Advisors have an identity problem. At Mullooly Asset Management, we have posted several articles on our site explaining the differences between brokers, financial advisors and fee-only advisors. There are differences between an investment advisor who is fee-only, and financial advisors.
Unfortunately, not enough people have learned the difference.
And this difference may cost them money.
Many in the investment community recognize these differences between a fee-only advisor and others in the industry. But most individual investors do not know the difference.
A fee-only advisory firm is compensated in a very simple way. The fee they charge their clients to manage assets for them (or through a financial planning fee), is their only compensation.
For everyone else in the investment-advice community, compensation works in several ways:
- Charging a fee for investment management
- Full-price commissions charged, versus discounted (or no-) commissions
- Charging an additional financial planning fee
- Selling products with built in sales charges
- Selling investment products with built-in recurring charges/fees
Or (often) — a combination of several of these methods listed here. Brokers, financial advisors, account executives (even some “financial planners”), may suggest investment where investors may not pay a sales charge (or commission) on top of their investments. But the investor might be subject to a back-end sales charge. Investors could be hit with relatively high recurring (built-in) charges. These recurring charges ought to be discussed (disclosed) at the time of purchase. Or explained in plain terms everyone understands.
There may not be anything wrong with this method of investing. But it would be a better business practice if investors were informed of the costs to them (and the choices they have at their disposal), before making an investment.
How a fee-only advisor is compensated is only part of the difference. There is also the issue of investment suitability, and fiduciary obligation. Brokers and financial advisors need to make sure their suggestions (recommendations) to their clients are suitable.
Meaning, investment recommendations should offer some potential for growth, if a client is interested in growth. Likewise, if the client is interested in generating income, then recommendations should be primarily income oriented.
A fee-only advisor has this same obligation PLUS the recommendations also need to be prudent. Issues like timing and price levels should come into the decision-making process. This is where fee-only investment advisors take on more of a fiduciary obligation than a financial consultant, broker or financial advisor.
All professionals in the investment community have some degree of fiduciary responsibility to their clients. Who you choose to work with determines how far that level of fiduciary responsibility goes.
Fee-Only: some additional posts:
Here are some additional posts we have regarding differences between fee-only advisors and the rest of the investment community: